Disadvantages of Conservative Mutual Funds
1. Not Risk-Free: Although conservative funds invest a majority of the assets in debt funds, they are not entirely risk-free. They are subject to default risk and interest rate risk. Default risk or credit risk is the risk of not receiving the principal amount. Interest rate risk is the fluctuation in interest rate causing volatility in the returns. Apart from this, the equity portion is exposed to market risks.
2. Fund Manager’s Expertise: The fund’s performance depends on the asset allocation which the fund manager decides. Hence, the fund’s success depends on the fund manager. The fund manager must have enough expertise to manage both equity and debt investments.
3. Low Returns: These funds give lower returns than pure equity or aggressive funds in a bullish market, as their exposure to equity is low.
4. Taxation on Short-Term Holding: If an investor holds a Conservative Mutual fund for a short-term duration, say 1 year, he/she shall be liable to pay tax as per their applicable income tax slab rates, and no benefit of indexation will be available.
5. No Guarantee of Success: The choice of investment between debt and equity stands different between different fund managers or AMC, so the returns will also differ as per the allocation. The portfolio by nature gives the investor an element of discretionary exposure due to the ability that the fund manager possesses to change the mix of assets in the fund.